Question

A bank offers two interest account plans. Plan A gives you 6% interest compound annually. Plan B gives you 13% annual simple interest. You plan to invest $2,000 for the next 4 years. Which account earns you the most interest (in dollars) after 4 years? How much will you have earned?

Answer 1

Sofia -- How did you get that answer?

I found a different answer.

Answer 2

i did the math in my head. Why? what is your answer

Answer 3

1.06^4 = 1.26248
*2000 = 2524.95
so earned 524.95

0.13 * 4 =.52
.52 * 2000 = 1040
so earned 1040.00
go with the 13 % simple

Answer 4

13% is so much more than 6% that the compounding will not catch up for many years.

Answer 5

oh wow is that you answer

Answer 6

Well how did you do it really ?

Answer 7

i don't really know i just did it in my head and i got that answer i do not know really how

Answer 8

Sofia -- please do not post answers unless you REALLY know what you are doing. You are not helping other students by posting wrong answers.

Answer 9

when you compound at interest rate x percent
every period you multiply by
(1+x/100)
so for 4 years at 6%
multiply four times by
(1 + .06)
which is the same as multiply by
1.06^4

if it were 6% per year compounded monthly
thet would be 6%/12 per month
.06/12 = .005
so we would multiply by 1.005 every month for 48 months
1.005^48 = 1.27
which is a little better than 1.26

Answer 10

i do not understand if it is 6% then is this explanation how you got 12%. which is it 6% or 12%

Answer 11

Iris,
You had your choice of 6% compounded or 13% simple for four years. 13% simple wins.

Answer 12

oh ok i get it now

Answer 13

Damon thank you so much for helping me understand Plan A and B. I forgot that the annual simple interest was 13% and accidentally got the wrong answer for Plan B, if I hadn't looked this up I would probably get the answer wrong. Also for Plan A I didn't know to subtract 2,000. Anyways, thank you so much Damon!